As a result of the formation of a free trade area between six member countries in the Pacific Rim, one member country found that its lower-cost external suppliers were replaced by higher-cost suppliers within the free trade area. This is an example of
A) trade creation.
B) strategic pricing.
C) synergy.
D) trade diversion.
E) protectionism.

Question

Quizplus · Accepted Answer

This scenario describes trade diversion, where trade shifts from a more efficient supplier outside the free trade area to a less efficient one within the area due to the preferential treatment of member countries.

As a Result of the Formation of a Free Trade